Turkish central bank seen giving in to rate hike pressure

Reuters

By Seda Sezer

ISTANBUL (Reuters) - The Turkish lira edged back from record lows on Monday after the central bank announced an emergency policy meeting, raising market hopes that it would ignore political pressure and implement a decisive rate hike.

The lira tumbled to 2.39 to the dollar in early trade but pulled back to above 2.33 after the bank said it would meet on Tuesday "to take necessary policy measures for price stability". The extraordinary meeting is the bank's first since August 2011, at the height of the euro zone debt crisis.

The bank said it would issue a statement on the outcome at midnight (2200 GMT) on Tuesday.

Prime Minister Tayyip Erdogan, keen to maintain economic growth ahead of an election cycle starting in two months' time, has been a vocal opponent of higher borrowing costs, railing against what he describes as an 'interest rate lobby' of speculators seeking to undermine the Turkish economy.

That has left the central bank struggling to contain the lira's precipitous slide.

"We think this is the reason why it took the central bank so much time to react. They probably made sure a more aggressive reaction is sanctioned by Erdogan," said Luis Costa, head of CEEMEA strategy at Citi.

"We think they are close to throwing in the towel."

ELECTIONS LOOM

Turkey's yield curve was inverted, suggesting that markets expected significant tightening.

The yield on the 10-year benchmark bond rose to 11.02 percent from 10.44 percent on Friday. The 2-year bond rose to 11.14 percent from 10.99 percent.

Turkish markets have been shaken in recent weeks by a graft investigation which became public on December 17 and which has become one of the biggest threats to Erdogan's 11-year rule.

The turmoil came at a bad time for Turkey, with the reduction in U.S. monetary stimulus already hammering emerging market assets.

The central bank has so far been reluctant to raise its main interest rates for fear of slowing growth ahead of local elections in March and a presidential poll due in August.

The bank kept its main rates on hold last week, but said it would fund the market at 9 percent on "additional tightening" days, when it does not hold repos and sells dollars at auction.

It also intervened directly in the market last Thursday, selling some $3 billion in its first direct intervention in the forex market for two years. But the lira continued to tumble.

"They need to deliver something in the order of a 200 basis point hike for any material stabilisation in the lira," said Lars Christensen, head of emerging market research at Danske Bank.

"But the growth implications of that will be pretty negative and I don't think they will sacrifice growth in the long run."

Both the government and central bank officials reject the notion that the central bank is anything other than independent.

But the new economy minister Nihat Zeybekci, appointed in a cabinet reshuffle last month, came out a day before last week's rate decision to underline the government's position, saying that the lira's weakness posed no threat, even if it fell to 2.35 or 2.40 to the dollar.

At its last emergency meeting in 2011, the bank cut its main policy rate to 5.75 percent from 6.25 percent to reduce the risk that the euro zone debt crisis and worries about global growth would trigger a domestic recession.

The main Istanbul stock index was down 1.36 percent at 63,554 points on Monday, outperforming the main global emerging market index, which was down 1.78 percent.

(Additional reporting by Dasha Afanasieva, Writing by Seda Sezer; Editing by Nick Tattersall and Gareth Jones)

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